Zimbabwe: Firms grapple with skyrocketing production costs

Source: Business Times, Zimbabwe

Local companies are finding it extremely difficult to stay in business, primarily as a result of rapidly rising production costs, Business Times can report.

According to multiple analysts and business executives, rising costs associated with statutory requirements and rocketing raw material prices are forcing companies to make difficult decisions about whether to raise prices for their products or absorb the increased costs and accept lower profits in order to stay in business.

If they increase the price of their goods, it might affect consumption further down the supply chain, exacerbate inflation, and hinder the recovery of the economy.

They issued warnings, claiming that the crisis will worsen the already precarious state of the economy and threaten the profitability of local businesses.

The CEO of the Chamber of Mines of Zimbabwe (CoMZ), Isaac Kwesu, told Business Times that in 2024, the cost of production would increase by 10% due to the additional challenges and the already intricate situation on the ground.

“As miners we expect the cost of production to increase by upwards of 10% due to anticipated electricity tariff increase, high cost of funding, and high royalty and taxes. Also, the  75%  forex retention threshold is inadequate to meet mining companies’ operational requirements and funding of capital projects.  

The retentions are under pressure from increasing demands for payments in foreign currency including electricity bills wholly paid in forex, some taxes and statutory payments paid in forex, and increased royalty and electricity bills thereby increasing the cost of production, making it difficult for the companies to increase production or to operate profitably,” Kwesu said.

He warned that businesses may cut capacity and output as a result of pressure on production costs.

“We anticipate that mineral revenue for 2023 is set to decline by approximately around 20% and is expected to further decline by an average of 10% in 2024 due to softening commodity prices. Despite most mining companies planning to ramp up production to compensate for revenue losses due to low prices, the production increase will be more than offset by the decline in prices.

“In terms of distribution of mining companies’ revenue, payments to suppliers, electricity bills, government, and employees are consuming approximately 88% of mining companies’ revenues,” he said.

“We also expect the commodity market conditions to worsen in 2024. They are anticipating commodity prices to further slowdown in 2024, mostly for PGMs and base metals citing geo-political tensions and weak global economic outlook.”

The challenges to 2024 economic growth, according to mining executives in the most recent State of the Mining survey report, are capital constraints, high inflation pressure, foreign exchange volatility, infrastructure deficiencies, and shortfalls in foreign currency.

“Survey findings show that profitability for mining companies declined by an average of 15% in 2023 due to softening commodity prices and high-cost structure. Approximately 50% of the respondents reported that they were now struggling to break even. When interrogated on profitability prospects for their businesses in 2024, most respondents (70%) indicated that they are expecting their profitability to worsen compared to 2023. Those that are expecting profitability to remain the same are mostly in the gold sector,” reads part of the report.

Infrastructure deficiencies, foreign exchange shortages, foreign exchange volatility, high inflation pressure, and capital constraints were listed by mining executives as the main obstacles to 2024 economic growth in the most recent State of the Mining survey report.

Mining executives are also projecting the PGM prices to slow down with platinum prices expected to fall by (5%), rhodium (15%) and palladium (10%), gold producers are expecting gold prices to fall by an average of 8%, while lithium producers and nickel producers are expecting price declines averaging 14% and 10%, respectively.

The Zimbabwe National Chamber of Commerce (ZNCC) claimed that several statutory requirements are making the already high cost of production worse in its most recent position paper to the government.

“We have so many taxes that continue to be a burden to business resulting in increased cost of production, thereby narrowing profit margins,” reads part of the document.

Kurai Matsheza, president of the Confederation of Zimbabwe Industries (CZI), said the high cost of production makes local goods uncompetitive.

“Government should reduce punitive legislations as compliance costs increase overheads by around 20%,  forcing the companies to suffer losses due to high costs. This will force companies to reduce production capacity,” he said.

Economist Prosper Chitambara said the high production costs have a negative impact on the nation’s economic prospects.

“Firms are battling that rising cost of production. I think what has exacerbated that is experiencing the power outages. The economy has been adversely affected or increased the cost of production weakened competitiveness.

“We have heard stories about businesses that had to close shop temporarily owing to power outages. So I would say that the biggest headache or challenge for most business,”  Chitambara said.

Another economist Vince Musewe weighed in saying: “The cost of production has been the case for some time. Zimbabwe’s business sector continues to face challenges to stay viable because you cannot run a profitable business in an unpredictable environment with too many unknown variables. You cannot plan or invest with certainty. Business stability remains a key challenge.”

ABOUT THE AUTHOR: LIVINGSTONE MARUFU, CLAUDINE MATOLA

Spread the love
News
Business
Stock Market
Jobs